In most companies, research and development funding seems to become especially vulnerable at the first sign of financial trouble. Largely that's because the value of R&D is hard to pin down. So Pittiglio Rabin Todd McGrath, a high-tech consulting company in Weston, Mass., is proposing a simple benchmark called the Index of R&D Effectiveness. It is calculated by dividing the percentage of total revenue spent on R&D into new-product profitability, which is also expressed as a percentage. PRTM recently applied this measure to 45 large electronics makers--with sobering results.
Just 9 of the 45 companies scored 1.0 or higher, indicating that only 20% enjoyed a positive payback on R&D. One reason that most companies missed breakeven: On average, they squandered 18% of R&D spending on products that never reached market. However, the top nine held such losses to 2.5% by running frequent checks on products vs. market opportunities--and canceling dogs quickly. They also got new products to market in half the time the others did, says PRTM Managing Director Michael E. McGrath. The bottom line: Revenue growth among the top 20% was double the average of all 45 companies.